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chapter 14
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Indicate whether the statement is true or false.
1. Prolonged periods of relatively high dollar values in world currency markets would be a disadvantage to U.S.
exporters and an advantage to their foreign competitors.
a.
True
b.
False
2. Bank and government loans used by exporters to finance working capital are called trade financing.
a.
True
b.
False
3. A group of banks that collectively make a loan to a firm is called a hedge.
a.
True
b.
False
4. A put option obligates an investor to sell an asset at a predetermined price.
a.
True
b.
False
5. The flexibility to unwind forex hedges when they are no longer needed is a convenient advantage.
a.
True
b.
False
6. The cost of equity is required rate of return by stockholders in a firm and is estimated by means of the Capital
Asset Pricing Model (CAPM).
a.
True
b.
False
7. Currency swaps allow firms to exchange currencies at a previously agreed exchange rate as a way to hedge
exchange rate movements.
a.
True
b.
False
8. On October 19, 1987 (Black Monday) stock prices in Hong Kong began collapsing and spread throughout the
day into the Europe and then North America. This is an example of contagion.
a.
True
b.
False
9. Bonds that are sold in any country outside the home country, but in the home country’s currency, are called
junk bonds.
a.
True
b.
False
10. Moody’s and Standard and Poor’s provide bond ratings, which are important in assuring the credit quality to
foreign investors.
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a.
True
b.
False
11. Marked-to-market involves the trading of futures contracts in major currencies and offering price
transparency and efficiency in addition to elimination of counterparty risk due to guaranteed payments on
contract.
a.
True
b.
False
12. Clearing House Interbank Payment System (CHIPS) is an organization that provides secure communication
for contracts, invoices, and other trade documents that normally accompany cash payments.
a.
True
b.
False
13. The sensitivity of a stock to market risk affected by currency movements is called the weighted average cost
of capital.
a.
True
b.
False
14. If losses occur causing a market participant’s balance to fall below the maintenance margin at the end of the
trading day, a call option occurs that requires the bank to replenish the investor’s trading account.
a.
True
b.
False
15. The two types of short-term effects on currency movements are transactions risk and transformational risk.
a.
True
b.
False
Indicate the answer choice that best completes the statement or answers the question.
16. A small commitment fee needed to purchase a futures contract is called a _____.
a.
margin
b.
speculator
c.
short position
d.
long position
e.
marked-to-market
17. Selling a currency in a currency futures contract and profiting on a decrease in the value of the currency over
time is called _____.
a.
hedging
b.
syndicating
c.
a short position
d.
a long position
e.
marked-to-market exchange position
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18. The weighted average of different interest rates paid on long-term borrowings is called the _____.
a.
net present value
b.
cost of debt
c.
cost of equity
d.
cost of capital
e.
exchange risk beta
19. The price paid by the buyer to the seller for an option contract is called a _____.
a.
call option
b.
put option
c.
premium
d.
currency swap
e.
marked-to-market
20. Of the following, which is NOT true about the IMF and World Bank?
a.
They were established in 1890.
b.
Their purposes are to promote international monetary stability and international trade.
c.
The IMF provides short-term loans to countries in financial crises.
d.
More than 180 countries participate as members of the IMF.
e.
The World Bank focuses upon long-term loans to developing countries seeking financing for
economic reform purposes intended to raise the standard of living.
21. When a bank sells a LC into the financial marketplace as a money market instrument, it is called a(n) _____.
a.
payment in advance
b.
commercial letter of credit
c.
banker’s acceptance
d.
syndicate
e.
bond rating
22. A stock value measured with the coefficient obtained by regressing the stock’s return on a currency’s return
over time is known as the _____.
a.
net present value
b.
value factor
c.
exchange rate sensitivity
d.
cost of capital
e.
beta risk
23. _____ offers payment protection to both exporters and importers, as the importer’s bank writes a guarantee
of payment.
a.
Payment in advance
b.
A commercial letter of credit
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c.
A banker’s acceptance
d.
A syndicate
e.
A bond rating
24. Using currency derivatives to reduce potential transaction, translation, and economic risks of currency
movements that could lead to losses for a firm or investor is called_____.
a.
hedging
b.
speculating
c.
a short position
d.
an organized exchange position
e.
a marked-to-market position
25. Large international firms deal in considerable volumes of goods and often must obtain a(n) _____ from a
group of banks known as a syndicate..
a.
commercial loan
b.
call option
c.
banker’s acceptance
d.
participation loan
e.
open account
26. Of the following, which is NOT true about international banking and payments?
a.
Payment in advance is the safest method.
b.
Payment in advance does not expose the importer to some risk concerning delivery of the goods.
c.
A commercial letter of credit offers payment protection to both parties.
d.
A commercial letter of credit is usually irrevocable.
e.
An open account is a simple agreement wherein the exporter sends an invoice with the goods and the
exporter pays upon the receipt.
27. Bonds that are sold in any country outside the home country, but in the home country’s currency, are called
_____.
a.
closed bonds
b.
foreign bonds
c.
domestic bomds
d.
Eurobonds
e.
junk bonds
28. A basket of currencies consisting of dollars, euros, pounds, and yen created by the International Monetary
Fund is known as the _____.
a.
Trade Right
b.
Value Factor Right
c.
Currency Right
d.
Export-Import Right
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e.
Special Drawing Right
29. A derivatives market run by large banks is called a(n) _____.
a.
margin contract
b.
over-the-counter market
c.
currency forward contracts
d.
organized exchanges
e.
marked-to-market
30. Moody's and Standard and Poor's issue _____.
a.
open accounts
b.
commercial letters of credit
c.
participation loans
d.
exchange rates
e.
bond ratings
31. Losses that are incurred and that cause the participant’s balance to fall below the maintenance margin at the
end of the trading day is called a _____.
a.
margin sell
b.
margin call
c.
short position
d.
long position
e.
marked-to-market
32. Forward contracts
a.
can never be arranged in the over-the-counter market.
b.
are less standardized than futures contracts.
c.
cannot be customized to meet the hedging needs of the buyer.
d.
are never marked-to-market.
e.
have a high liquidity risk related to immediate cash access to pay for possible losses.
33. An Export-Import Bank is a(n)
a.
organization that provides secure communications for trade documents.
b.
derivatives market run by a syndicate of large banks.
c.
organization that provides large, wholesale dollar payments services for governments.
d.
U.S. government export finance agency that seeks to level international competition.
e.
large global bank that makes loans exclusively to international firms.
34. A simple agreement wherein the exporter sends an invoice with the goods and the exporter pays upon the
receipt is called a(n) _____.
a.
open account
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b.
commercial letter of credit
c.
banker’s acceptance
d.
participation loan
e.
bond rating
35. _____ risk refers to the ways in which long-term exchange rate movements affect firms.
a.
Transactions
b.
Translation
c.
Economic
d.
Consolidated
e.
Accounting
36. _____ allow firms to exchange currencies at a previously agreed exchange rate as a way to hedge exchange
rate movements.
a.
Call options
b.
Put options
c.
Premiums
d.
Currency swaps
e.
Marked-to-market contracts
37. Home bias tends to
a.
reduce diversification.
b.
increase contagion.
c.
increase diversification.
d.
reduce contagion.
e.
increase the price of domestic bonds.
38. The safest method available to an exporter, but that which exposes the importer to some risk related to
delivery of goods, is called _____.
a.
payment in advance
b.
a commercial letter of credit
c.
a banker’s acceptance
d.
a syndicate
e.
a bond rating
39. Buying a currency in a currency futures contract and profiting on an increase in the value of the currency
over time is called _____.
a.
hedging
b.
syndicating
c.
a short position
d.
a long position
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e.
marked-to-market
40. Two kinds of short-term effects of currency movements are _____ risk and _____ risk.
a.
transactions; translation
b.
transactions; exchange rate
c.
economic; translation
d.
consolidated; economic
e.
accounting; translation
41. _____ risk is associated with the short-term effects of currency movements on the consolidated accounting
statements of a firm.
a.
Transactions
b.
Translation
c.
Economic
d.
Consolidated
e.
Accounting
42. The required rate of return demanded by stock and bond investors and used in net present value capital
budgeting analyses as the discount rate is called the _____.
a.
net present value
b.
cost of debt
c.
cost of equity
d.
cost of capital
e.
exchange risk beta
43. Whether a firm has growth or value and how this firm characteristic affects an estimate of the cost of equity
is called the _____.
a.
net present value
b.
value factor
c.
cost of equity
d.
cost of capital
e.
beta risk
44. The impact of random change in the value of one currency with respect to other currencies is called the
_____ risk.
a.
transactions
b.
exchange rate
c.
economic
d.
consolidated
e.
accounting
45. The sensitivity of a stock to market risk affected by currency movements is known as the _____.
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a.
net present value
b.
value factor
c.
exchange rate sensitivity
d.
cost of capital
e.
exchange risk beta
Enter the appropriate word(s) to complete the statement.
46. A holding firm is a(n) ______ firm that is common in multinational corporations.
47. A currency swap combined with a(n) ______ swap is called a pain vanilla currency swap.
48. ______ is the sensitivity of a stock to market risk affected by currency movements.
49. _______ accounting statements are the income statements and balance sheets of multinational corporations
and of all subsidiaries abroad due to home tax requirements.
50. Large global banks are called _______ center banks.
51. _______ is the safest method available to an exporter, but that which exposes the importer to some risk
related to delivery of goods.
52. ______ is a coefficient obtained by regressing a stock’s return on a currency’s return over time.
53. Investors who attempt to earn profits from trading in currencies or currency derivatives are referred to as
_______.
54. How short-term changes in exchange rates can affect operating costs and revenues of firms engaged in
international business activities is referred to as ________ risks.
55. ______ is an examination of optimistic, expected, and pessimistic scenarios to give a more complete picture
of the risks and returns of investments abroad.
Scenario – Aero, Inc.
Aero, Inc. started from the idea of Brad Aerostle of Madison, South Dakota in 1992. Brad earned a financial
degree from Harvard and had watched the financial markets for years. Armed with college credentials and
knowledge, he believed he could offer needed services to individuals and companies desiring to conduct
business around the globe. From the minute Brad put his idea into motion, his brainchild – Aero, Inc. – proved
quite profitable.
Aero, Inc. currently has over five thousand clients ranging from slightly wealthy individuals to very rich and
thriving corporations around the world. Brad’s skill at what he does has made his company a sought out firm
by those who want to prosper in the foreign marketplace.
56. Aero, Inc. likes to make its customers aware of what is taking place within the global financial world. One
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of the lessons it imparts to its clients is about the International Monetary Fund’s special drawing right. Which
of the following best identifies what Aero, Inc. would be discussing with its clients?
a.
The short-term effects of currency movements on the consolidated accounting
statements of a firm
b.
The ways in which long-term exchange rate movements affect firms
c.
Buying a currency in a currency futures contract and profiting on an increase in
the value of the currency over time
d.
The Global Center for Financial Restructuring
e.
A basket of currencies consisting of dollars, euros, pounds, and yen
57. One of the prominent concerns the clients of Aero, Inc. express is that of currency fluctuations. The clients
know fluctuations in currency can wind up costing them money. Aero, Inc. alleviates its clients concern by
suggesting the client enter into a situation where currencies can be exchanged at a previously agreed exchange
rate as a way to hedge exchange rate movements. Which one of the following best identifies what Aero, Inc. is
likely suggesting?
a.
Currency swap
b.
Call option
c.
Sensitivity analysis
d.
Speculation
e.
Diversification
58. When Aero, Inc. recommends purchasing futures contracts to its clients, it always informs the clients of the
rather small commitment fee that is needed to purchase a futures contract. Which one of the following best
identifies what this fee is called?
a.
Weighted average cost of capital
b.
Margin
c.
Put option
d.
Beta risk
e.
Margin call
Scenario – The Gayla Corporation
The Gayla Corporation is a multinational business that conducts operations in twelve foreign markets. This
multi-million dollar organization is very familiar with currency exchanges and has considerable understanding
when it comes to the risks associated with operating in the global market arena. The Gayla Corporation claims
it would not be as successful without the expertise of the financial wizards that work for it. The company has
not lost money so far and plans to stay that way.
59. The financial experts of the Gayla Corporation are very much aware of the organization’s cost of
debt. Which of the following best identifies what cost of debt means to the corporation?
a.
Futures contracts in which gains are earned at the end of each trading day
b.
Ways in which long-term exchange rate movements affect firms
c.
Sum of the cost of capital and the cost of equity
d.
The required rate of return by stockholders in a firm that is estimated by means of
CAPM
e.
Weighted average of different interest rates paid on long-term borrowings
60. The Gayla Corporation must fully understand and effectively handle all the ways in which long-term
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exchange rate movements affect the firm. Which of the following best identifies what this organization is facing
in this situation?
a.
Economic risk
b.
Beta risk
c.
Transactions risk
d.
Hedging
e.
Translation risk
61. When the Gayla Corporation conducts its operations in foreign markets, its customers often pay in different
forms of currency. Many times there is a difference in the value of that currency received in comparison to the
company’s U. S. currency. Which of the following best identifies what the Gayla Corporation is
experiencing?
a.
Translation risk
b.
Economic risk
c.
Short position
d.
Exchange rate risk
e.
Transactions risks
62. Does exchange rate risk affect a firm’s cash flows and its stock value? Explain.
63. Explain the domestic versus global cost of capital.
64. Differentiate between hedging and speculating.
65. Differentiate between transaction and translation risks. Explain how these risks affect firms and investors.
66. Compare and contrast the Export-Import (Ex-Im) Bank and Japan's Bank of International Cooperation.
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Answer Key
1. True
2. True
3. False
4. False
5. True
6. True
7. True
8. True
9. False
10. True
11. False
12. False
13. False
14. False
15. False
16. a
17. c
18. b
19. c
20. a
21. c
22. c
23. b
24. a
25. d
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26. b
27. d
28. e
29. b
30. e
31. b
32. b
33. d
34. a
35. c
36. d
37. a
38. a
39. d
40. a
41. b
42. d
43. b
44. b
45. e
46. conglomerate
47. interest rate
48. Exchange risk beta
49. Consolidated
50. money
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51. Payment in advance
52. Exchange rate sensitivity
53. speculators
54. transactions
55. Sensitivity analysis
56. e
57. a
58. b
59. e
60. a
61. d
62. Student answers will vary.
63. Student answers will vary.
64. Student answers will vary.
65. Student answers will vary.
66. Student answers will vary.
